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Eventually BoE must stop pretending it can be dovish forever, RBS says

The Bank of England will come under increased pressure to move on monetary policy given the recent indications of improvement in the labour market and signs of overheating in the housing market, but is unlikely to turn hawkish.

One reason for that is that the Monetary Policy Committee believes that macro-prudential policy can help curb pressures on the prices for homes.

Nonetheless, team of analysts led by Alberto Gallo at Royal Bank of Scotland wrote to clients on Monday: "Our fear is that macro-pru will tackle the symptoms of asset overvaluation, rather than its actual causes. [...] The real cure is perhaps withdrawing some of the stimulus, even if it does mean creating a bit of volatility across markets."

In that regard, they recalled how back in 2011 Norway - one of the first countries to implement macro-prudential measures since the crisis - capped loan-to-value ratios for mortgages and asked its systemic banks to hold higher capital ratios in an attempt to cool down the housing market.

It worked, but only for a few quarters, with house prices down by around 6% in 2013. However, they have since regained most of the ground lost.

"Eventually, central bankers in the UK (and US) will have to stop pretending they can be dovish forever," RBS says.

Their forecasts call for 10-year yields on US Treasuries and Gilts to end 2014 at 3.2%.

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